Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Friday, March 23, 2012

Problems at BATS

The IPO of BATS Global Markets did not get off to a good start today.  BATS operates two electronic exchanges in the U.S. which account for about 11-12% of all U.S. equity trading.  Selling sharerholders are offering about 6.3 million shares, which were priced Thursday at $16 per share.  The Wall St. Journal's lead story today reports on an SEC investigation into whether high-frequency traders use connections with computerized exchanges to gain an unfair advantage and specifically names BATS.  WSJ, SEC Probes Rapid Trading.  Then the IPO was halted on Friday morning after Nasdaq reported "erroneous trades" in BATS stock, and BATS itself reported problems with trading errors in Apple stock.  WSJ, BATS IPO Halted After Erroneous Trades

March 23, 2012 in News Stories | Permalink | Comments (0) | TrackBack (0)

NASAA Calls JOBS Act "an Investor Protection Disaster Waiting to Happen"

Senate Passes JOBS Act

The Senate passed the JOBS Act yesterday by a vote of 73-26.  Because there are some differences from the House Bill, the versions must be reconciled.  This legislation appears to be on a fast track, so this may occur next week, and President Obama is expected to sign it.

Its supporters say the bill will create jobs, although I have not seen any factually-based support for this assertion.  The bill weakens significant investor protections, as many have pointed out in the past few weeks, including Professor John Coffee (Columbia Law), Professor Harvey Goldschmid (Columbia Law and former SEC Commissioner), Professor Simon Johnson (MIT) and SEC Chair Mary Schapiro.

There are three provisions that I find especially troubling.  First, the legislation creates a category of "emerging growth companies," defined as companies with less than $ 1 Billion of annual gross revenues.  Experts estimate this accounts for 90% of publicly traded companies.  Emerging growth companies are exempt from many important financial disclosure and accounting requirements, including the SOX 404(b) requirement that an independent auditor assess internal controls.

Second, the restrictions on research reports and securities analysts' communications are eliminated with respect to these emerging growth companies.  You'll remember that analysts' cheerleading for IPOs was one of the scandals of the bubble and bust.

Third, the act authorizes "crowdfunding," which, according to Professor Coffee, essentially legalizes boiler room operations.  It permits unregulated offerings of securities up to $1 million to small investors.  The House version limits each investor's participation to $10,000 or 10% of annual income (whichever is less); the Senate version is the greater of $2,000 or 5% of income or net worth if either figure is less than $100,000.  Apparently the philosophy is that if the amount is small enough, unsophisticated investors can be defrauded.

This is dreadful legislation.  Congress has no memory of past frauds, and both Republicans and Democrats alike want to jump on the deregulatory bandwagon under the banner of job creation.

March 23, 2012 | Permalink | Comments (0) | TrackBack (0)

Thursday, March 22, 2012

Senate Approves House Version of STOCK Act

The Senate voted (96-3) for legislation that bans insider trading by members of Congress and their staff by establishing that they owe a duty of trust and confidence to Congress, the federal government and U.S. citizens.  The Senate accepted the version approved by the House (417-2) and thus does not include certain additional provisions that were contained in the original Senate version, including regulation of the "political intelligence" community.  The bill requires disclosure of purchases and sales within 45 days of the transaction.  NYTimes, Insider Trading Ban for Lawmakers Clears Congress

The Senate also passed the JOBS legislation which must still be reconciled with the House version.  I will write more about this in a later post.

March 22, 2012 in News Stories | Permalink | Comments (0) | TrackBack (0)

U Cincinnati Presents Symposium on Dodd-Frank March 30

The 25th Annual Corporate Law Symposium at the University of Cincinnati College of Law will be held on March 30.  The topic is Implementing the Dodd-Frank Wall St. Reform and Consumer Protection Act, and the panelists represent a variety of viewpoints from the academic, policy-making and legal communities.  If you are in the Cincinnati area, we would love to see you!  It will also be webcast.

(Download CLSProgramFINAL)

March 22, 2012 in Professional Announcements | Permalink | Comments (0) | TrackBack (0)

Brokerage Firms Can Profit From Sending Confirmations: 7th Circuit

Customers' complaints that their brokerage firms overcharge for their services rarely fare well in the courts, and the Seventh Circuit's recent opinion in Appert v. Morgan Stanley (Mar. 8, 2012) is no exception.  Plaintiffs brought a class action complaining that Morgan Stanley's fee for sending confirmations (a "handling, postage and insurance" or HPI fee) bore no relationship to actual costs and was excessive.  In 2002, the HPI fee was $2.35 per transaction, later raised to $5.00 and then $5.25.  In 2002, postage and handling charges were about 43 cents.

So what, said the court in affirming the district court's dismissal.  The customer's agreement with the firm did not suggest that the HPI fee represented actual costs, and Morgan Stanley had no implied duty under applicable state law to charge a fee that was reasonably proportionate to actual costs where it notified customers in advance of the charges and they were free to decide whether to continue business with the firm.

March 22, 2012 in Judicial Opinions | Permalink | Comments (0) | TrackBack (0)

Wednesday, March 21, 2012

Harvey Goldschmid on "Survival of Investor Protection"

The SEC Historical Society will have a live broadcast tomorrow of a lecture by Harvey J. Goldschmid, a professor at Columbia Law School and former SEC Commissioner and General Counsel.  The title of the lecture is "Survival of Investor Protection."  The emphasis is mine and the choice of words, I think, is telling -- not "Enhancement," not "Improvement," but "Survival" of Investor Protection.  The lecture is at 4 p.m.; for further information, go to the Society's website:


March 21, 2012 in Professional Announcements | Permalink | Comments (0) | TrackBack (0)

Tuesday, March 20, 2012

Fifth Circuit Finds SLUSA Does Not Preclude Stanford Investors' State Claims

The Fifth Circuit recently held that SLUSA did not preclude state law class actions seeking to recover damages for losses resulting from the Stanford ponzi scheme, because the purchase or sale of securities (or representations about the purchase or sale of securities) was "only tangentially related" to the ponzi scheme.  Roland v. Green (5th Cir. Mar. 19, 2012). (Download Roland.031912[1])

In that case Louisiana investors sued the SEI Investments Company (SEI), the Stanford Trust Company, the Trust's employees and the Trust's investment advisers alleging violations of Louisiana law.  According to the plaintiffs, the Antigua-based Stanford International Bank (SIB) sold CDs to the Trust, which served as the custodian for individual IRA purchases of the CDs.  The Trust, in turn, contracted with SEI to administer the Trust, making SEI responsible for reporting the value of the CDs.  Plaintiffs allege that misrepresentations by SEI induced them to use their IRA funds to purchase the CDs, including that the CDs were a safe investment because SIB was "competent and efficient," that independent auditors "verified" the value of SIB's assets, and that SIB's assets were invested in a "well-diversified portfolio of highly marketable securities."  The defendants sought removal to district court on the basis of SLUSA preclusion.  (Roland was consolidated with two similar class actions.)

The district court, in holding that SLUSA precluded the class actions, acknowledged that the SIB CDs were not themselves "covered securities" under the statute, but determined that this did not end the inquiry.  It found that the requisite connection existed because (1) the plaintiffs' purchases of the CDs were allegedly induced by the representation that SIB invested in a portfolio of "covered securities" and (2) at least one plaintiff's purchases of the CDs were allegedly funded by sales of covered securities.

Though the question of the scope of the "in connection with" requirement under SLUSA was one of first impression in the Fifth Circuit, the appeals court noted that six circuits have addressed the issue.  The Fifth Circuit initially found the decisions from the Second, Ninth and Eleventh Circuits most useful, because they attempted to give dimension to what is sufficiently connected/coincidental to a transaction in covered securities to trigger SLUSA preclusion.  However, because each of these Circuits stated the requisite connection in a slightly different formulation, the Fifth Circuit looked to cases where the facts were closer to the allegations in this case, i.e., where the alleged fraud was centered around the purchase or sale of an uncovered security like the CDs in this case.  Accordingly, the court turned its attention to the "feeder fund" cases arising from the Madoff ponzi scheme and described three different approaches used by the courts: (1) whether the financial product purchased was a covered security (the product approach), (2) what was the separation between the investment in the financial product and the subsequent transactions in covered securities (the separation approach), (3) what were the purposes of the investment (the purposes approach).

Next, the Fifth Circuit returned to the "policy consideration" that the U.S. Supreme Court relied on in Dabit in determining the scope of the in connection with requirement and found persuasive Congress's explicit concern about the distinction between national, covered securities and other, uncovered securities.  "That SLUSA would be applied only to transactions involving national securitiess appears to be Congress's intent."  It also recognizes that "state common law breach of fiduciary duty actions provide an important remedy not available under federal law."  The court also acknowledged the concern expressed by some members of Congress who filed an amicus brief: "The interpretation of SLUSA and the 'in connection with' requirement adopted by the District Court ... could potentially subsume any consumer claims involving the exchange of money or alleging fraud against a bank, without regard to the product that was being peddled."

Ultimately, the Fifth Circuit concluded that the standards articulated by the Second and Eleventh Circuits were too stringent and adopted the Ninth Circuit test -- a misrepresentation is "in connection with" the purchase or sale of securities if there is a relationship in which the fraud and the stock sale coincide or are more than tangentially related.

In applying the test, the Fifth Circuit agreed with the district court that the fact that the CDs were uncovered securities did not end the inquiry and that it must closely examine the schemes and purposes of the frauds alleged by the plaintiffs.  It disagreed with the district court, however, about the importance of the representation that SIB's assets were invested in marketable securities because that was only one of many representations made to induce plaintiffs to purchase the CDs.  Rather, the "heart, crux and gravamen" of the fraudulent scheme was the representation that the CDs were a "safe and secure" investment.  It also dismissed the significance placed by the district court on the fact that at least one plaintiff sold covered securities to finance the purchase of CDs, because the fraud did not depend upon the defendant convincing the victims to sell their covered securities.  Accordingly, in both instances, the representations were no more than "tangentially related" to the purchase or sale of covered securities.


March 20, 2012 in Judicial Opinions | Permalink | Comments (0) | TrackBack (0)

Second Circuit Appoints Attorney to Argue in Support of Judge Rakoff's Position in SEC v. Citigroup

The Second Circuit appointed John R. Wing, Esq., of Lankler Siffert & Wohl, as counsel "to argue in support of the district court's position" in the appeal of SEC v. Citigroup.  Mr. Wing was recommended by Jed Rakoff.  (Although deciding only procedural issues, the Second Circuit last week expressed no support for Judge Rakoff's view of the scope of judicial review of an SEC settlement.)

According to his firm's website, Mr. Wing, for more than 25 years, has been actively involved in criminal trial, pretrial and appellate work, representing clients charged with, or under investigation for, violations involving securities, tax, antitrust, labor, environmental, fraud, bribery, money laundering and RICO laws.  Mr. Wing is a Fellow of the American College of Trial Lawyers and past President and Director of the New York Council of Defense Lawyers.  Mr. Wing has published and lectured extensively on jury trial work and criminal law topics and has taught trial advocacy courses at a number of law schools.

March 20, 2012 in Judicial Opinions | Permalink | Comments (0) | TrackBack (0)

Monday, March 19, 2012

Mets Owners and Madoff Trustee Settle Charges

Mets owners Fred Wilpon and Saul Katz settled charges brought by the Madoff Trustee, Irving Picard, that they were willfully blind to Madoff's fraud and thus avoided a jury trial.  They agreed to pay up to $162 million; the Trustee was seeking about $300 million.  In addition, they won't have to pay for three years, and the amount can be reduced by recoveries the Mets owners would have been entitled to receive in the bankruptcy proceeding..  WSJ, Mets Owners to Pay $162 Million to Madoff Trustee

March 19, 2012 in News Stories | Permalink | Comments (0) | TrackBack (0)

SEC Charges Former CKE Restaurants Exec with Insider Trading

On March 15, 2012, the SEC charged Noah J. Griggs, Jr., a former executive at the parent company of Carl’s Jr. and Hardee’s fast food restaurants, with insider trading in the company’s securities based on confidential information he learned on the job.

The SEC alleges that  Griggs, who was executive vice president of training and leadership development at CKE Restaurants Inc., made two purchases totaling 50,000 shares of CKE stock after attending an executive meeting during which he learned that the company was in discussions with private equity investors about a possible acquisition. Griggs made a potential profit of $145,430 after the stock price soared when the merger was announced publicly. Griggs has agreed to pay $268,000 to settle the SEC’s charges without admitting or denying the allegations.

March 19, 2012 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Releases Analysis of Data on Credit Default Swaps

On March 15 the SEC staff made available publicly an analysis of market data related to credit default swap transactions. The analysis, which was conducted by the staff of the SEC’s Division of Risk, Strategy, and Financial Innovation, is available for review and comment as part of the comment file for rules the SEC proposed, jointly with the Commodity Futures Trading Commission, to further define the terms “swap dealer," "security-based swap dealer," "major swap participant," "major security-based swap participant," and "eligible contract participant." The SEC and CFTC jointly proposed those rules in December 2010 as one part of the implementation of Title VII of the Dodd-Frank Act.

According to the press release, the SEC staff believes that the analysis of market data has the potential to be informative for evaluating certain final rules under Title VII, including rules that further define “major security-based swap participant” and “security-based swap dealer,” and rules implementing the statutory de minimis exception to the latter definition. Analyses of this type particularly may supplement other information considered in connection with those final rules, and the SEC staff is making this analysis available to allow the public to consider this supplemental information. The SEC staff expects that the Commission will consider the adoption of rules defining these terms in the next several weeks.

March 19, 2012 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Alleges Phony Stock Lending Scheme Defrauded Execs

The SEC charged two senior executives and their California-based firm with defrauding officers and directors at publicly-traded companies in an elaborate $8 million stock lending scheme.  According to the SEC, Argyll Investments LLC’s purported stock-collateralized loan business is merely a fraud perpetrated by James T. Miceli and Douglas A. McClain, Jr. to acquire publicly traded stock from corporate officers and directors at a discounted price from market value, separately sell the shares for full market value in order to fund the loan, and use the remaining proceeds from the sale of the collateral for their own personal benefit. Miceli, McClain, and Argyll typically lied to borrowers by explicitly telling them that their collateral would not be sold unless a default occurred. However, since Argyll had no independent source of funds other than the borrowers’ collateral, Argyll often sold the collateral prior to closing the loan and then used the proceeds to fund it.

Also charged in the SEC’s complaint filed in U.S. District Court for the Southern District of California is a broker through which Argyll attracted potential borrowers. The SEC alleges that AmeriFund Capital Finance LLC and its owner Jeffrey Spanier violated the federal securities laws by brokering numerous transactions for Argyll while not registered with the SEC.

March 19, 2012 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Charges Adviser with Providing Fund Investors with Bogus Audit Report

The SEC recently charged James Michael Murray, a San Francisco-area investment adviser, with defrauding investors by giving them a bogus audit report that embellished the financial performance of the fund in which they were investing.  According to the SEC, Murray raised more than $4.5 million from investors in his various funds including Market Neutral Trading LLC (MNT), a purported hedge fund that claimed to invest primarily in domestic equities. Murray provided MNT investors with a report purportedly prepared by independent auditor Jones, Moore & Associates (JMA). However, JMA is not a legitimate accounting firm but rather a shell company that Murray secretly created and controlled. The phony audit report misstated the financial condition and performance of MNT to investors.

The U.S. Attorney’s Office for the Northern District of California also has filed criminal charges against Murray.

The SEC alleges that the bogus audit report provided to investors understated the costs of MNT’s investments and thus overstated the fund’s investment gains by approximately 90 percent. The JMA audit report also overstated MNT’s income by approximately 35 percent, its member capital by approximately 18 percent, and its total assets by approximately 10 percent.

March 19, 2012 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Settles Insider Trading Charges Against Management Consultant

The SEC recently charged Sherif Mityas, a Chicago-based management consultant, with insider trading based on confidential information about his client’s impending takeover of a Long Island-based vitamin company.  According to the SEC, Mityas was retained by Washington, D.C.-based private equity firm The Carlyle Group to provide strategic advice related to the acquisition of NBTY Inc. That same month, Mityas purchased NBTY stock and subsequently tipped a relative who also bought NBTY shares. After Carlyle publicly announced its acquisition of NBTY, Mityas and his relative sold their NBTY stock for a combined profit of nearly $38,000.

Mityas agreed to pay more than $78,000 to settle the SEC’s charges. In a parallel action, the U.S. Attorney’s Office for the Eastern District of New York today announced the unsealing of criminal charges against Mityas.


March 19, 2012 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Issues Alert on Stengthening Compliance Practices for Underwriting Muni Bonds

The SEC issued a Risk Alert on compliance measures to help broker-dealers fulfill their due-diligence duties when underwriting offerings of municipal securities and issued an Investor Bulletin to help educate investors about municipal bonds.

The alert issued by the SEC’s Office of Compliance Inspections and Examinations (OCIE) notes that in recent years there has been significant attention focused on the financial condition of some state and local governments and cites concerns about the extent of written documentation by broker-dealers of due diligence efforts and supervision of municipal securities offerings.

The alert includes examples of practices used by broker-dealers that may help to demonstrate due diligence and supervisory reviews. The Investor Bulletin issued by the SEC’s Office of Investor Education and Advocacy (OIEA) describes the attributes of municipal bonds, including investment risks, and provides information on where investors may obtain additional data on particular bonds.


March 19, 2012 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Insurance Agent Convicted of Selling Annuity to Woman Suffering from Dementia

An independent insurance agent in California has been sentenced to 90 days in jail for selling an indexed annuity to a 83 year old woman who was showing signs of dementia according to the prosecutor.  Glenn Neasham was convicted under a state law protecting the elderly.  His attorney plans to appeal.  WSJ, Annuity Case Chills Insurance Agents

March 19, 2012 in News Stories, Other Regulatory Action | Permalink | Comments (1) | TrackBack (0)

Citi Fines Citigroup Sub for Excessive Markups and Markdowns on Bond Transactions

FINRA announced today that it fined Citi International Financial Services LLC, a subsidiary of Citigroup, Inc., $600,000 and ordered more than $648,000 in restitution and interest to more than 3,600 customers for charging excessive markups and markdowns on corporate and agency bond transactions, and for related supervisory violations.

FINRA found that from July 2007 through September 2010, Citi International charged excessive corporate and agency bond markups and markdowns. The markups and markdowns ranged from 2.73 percent to over 10 percent, and were excessive given market conditions, the cost of executing the transactions and the value of the services rendered to the customers, among other factors. In addition, from April 2009 through June 2009, Citi International failed to use reasonable diligence to buy or sell corporate bonds so that the resulting price to its customers was as favorable as possible under prevailing market conditions. 

During the relevant period, Citi International's supervisory system regarding fixed income transactions contained significant deficiencies regarding, among other things, the review of markups and markdowns below 5 percent and utilization of a pricing grid for markups and markdowns that was based on the par value of the bonds, instead of the actual value of the bonds. Citi International was also ordered to revise its written supervisory procedures regarding supervisory review of markups and markdowns, and best execution in fixed income transactions with its customers.

In concluding this settlement, Citi International neither admitted nor denied the charges.

March 19, 2012 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)